BOSTON--(EON: Enhanced Online News)--In closing a year of remarkable geopolitical events, there are still many unknowns that will only be revealed when the dust settles from the major elections and referendums across the globe. Natixis Global Asset Management today announced insights from some of its leading mutual fund managers.
Volatility Ahead: Proceed with Caution
Downside risk is currently elevated at above average, although not at extreme levels for international and emerging market stocks.1 For U.S. stocks, the measure is slightly below average. This may seem counter-intuitive given the modest gains delivered by stocks thus far in 2016 and the relatively positive market reaction to the U.S. presidential election results. But perhaps it isn’t all that surprising.
Recall the rollercoaster stock market of the first quarter of 2016, when investors became concerned about the slowdown in Chinese economic growth. Almost a year later, the health of the Chinese economy continues to be a global risk. Add to that the wildcard of the direction of U.S. and Chinese trade relations post-election. Other concerns weighing on global markets include rising interest rates in the U.S., a weak European recovery weighed down by immigration complexities and a refugee crisis. Mid-year, Brexit also added a pint of uncertainty to the world order.
Against this backdrop, it appears the only certainty is persistent uncertainty. This uncertainty has contributed to a relatively wild ride in the U.S. stock markets over the year, where we have seen a trough to peak move in the S&P 500 Index of over 20%.2 While we do not view global equity risk at extreme levels, we do believe investors should proceed with caution.
– AlphaSimplex Group
Prudent Diversification Matters in an Uncertain Environment
Investor uncertainty is unusually high due to a number of factors, and investors are correct to be nervous. The U.S. stock market is less than six months from becoming the second longest bull market in post-World War II history. While negative factors, such as high stock valuations and declining corporate earnings, are balanced by positive, including lower cumulative returns than two other historic bull markets, and the potential for growth-oriented policies under a new administration, the outlook remains mixed. For bonds, the pathway to higher interest rates is not yet clear. However, the long-term trend of declining rates may be over and inflation expectations are starting to get priced into longer-term bond yields.
Recent market volatility has been consistent with the typical election year pattern: average volatility to begin the year, below average in the second and third quarter, with increasing volatility in the fourth quarter. On a macro level, we appear to have entered a multi-year period of average to elevated volatility, which began in August 2015. We expect a return to average to elevated volatility levels based on policy uncertainty, bond market dynamics and current stock market fundamentals.
In this environment, asset allocation decisions are challenging. Abandoning bonds in anticipation of rising rates or low returns may result in being over-exposed to stocks when the bull market comes to an end. At the same time, dealing with uncertainty and risk by maintaining significant long-term exposure to cash and investment-grade bonds may reduce portfolio-level risk in the short term, but may also hamper overall returns as long as the stock market continues to advance. In this environment, investments that are not sensitive to interest rate movements could be an important consideration.
– Gateway Investment Advisers
Commercial Real Estate Remains Positive
The U.S. economy regained momentum in the second and third quarter of 2016 and is expected to finish the year at 2% real annual growth. Yet, despite steady job growth, a low unemployment rate, signs of accelerating wage growth and increases in the CPI (consumer price index), normalization of U.S. monetary policy remains on hold as the Federal Open Market Committee (FOMC) continues to weigh risks to U.S. and global growth. Most observers believe the FOMC will raise the overnight lending rate in December and the long end of the U.S. yield curve has already moved in response to expectations of faster growth and higher inflation post-election. At the same time, long-term interest rates remain near or below zero in many countries.
In this global low-yield environment, investor interest in U.S. commercial property remains strong. Increased direct foreign investment has helped drive property yields to record lows. As a result, investor concern over current property valuations remains heightened and return expectations have moderated. Surveys suggest total return expectations from unleveraged core property to be lower but positive over the next five years. Lower but positive return expectations reflect the generally strong property market fundamentals that remain in place. We expect property income growth will gradually downshift to more “normal” levels over the long term as vacancy rates are now below long-term averages in most markets and rental rates are near or above pre-crisis peaks.
Even in an environment of moderating returns, commercial property continues to present a compelling investment opportunity relative to other asset classes in this world of low yields. Despite a strong rally in U.S. stock prices and a sharp sell-off in U.S. government bonds in the days immediately following the election, we anticipate little change in economic and property market fundamentals through the first half of 2017. With a clear and strong earnings outlook over the next several years, real estate should continue to be competitive with other asset classes on a risk-adjusted basis.
– AEW Capital Management
Higher Interest Rates Present Future Opportunity for Muni Investors
The outcome of the November election surprised most investors who had expected a continuation of divided government alongside steady economic growth accompanied by low levels of inflation rising slowly toward the Fed’s 2% target. But the return of the presidency and both houses of Congress to control of a single party quickly changed the narrative as investors seized on the likelihood of potentially significant fiscal stimulus after more than 5 years of self-imposed austerity, expected to impact the economy at a time when the labor market is already considered either at or near full employment. Rate markets experienced yields rising and curves steepening across the board. For the near term, the municipal market may experience a slowdown in issuance as the jump higher in rates serves as a drag on Refunding Issuance, while over the longer term, the potential for an expanded infrastructure program would likely see higher levels of New Money Issuance depending upon the scope of the legislation. State and local issuers have traditionally financed approximately 75% of infrastructure investment in the U.S. in the critical areas of Water and Transportation.
We expect the rate markets to catch a foothold given the swift move in yields to date. The Fed will largely be in the position of following the market and, as such, could have more latitude in 2017 amid the move higher in rates across the yield curve3. But reinvestment risk has plagued investors for much of the post-Great Recession period with nominal yields down by roughly 200 basis points across most of the curve over the past 8 years. The ability to invest at higher levels and extend along a more positively sloped yield curve should present an attractive opportunity for many investors. The municipal market has largely traded in tandem with Treasuries over much of the past year. We would not expect a significant deviation from that tendency over the near term as rate movements predominate potential sector developments in the current environment. As the new Administration is formed and legislation begins to move forward, municipal investors will keep a keen eye on whether a municipal infrastructure subsidy program (like the Build America Bond Program) is part of the package as well as the ultimate impact of potential tax reform legislation. We expect moderate changes in marginal tax rates to have a muted effect on relative performance given that valuations remain historically wide.
– McDonnell Investment Management, LLC
Return to Growth (Slowly)
A return to growth could create a very unpleasant surprise for many investors, as investments widely perceived as safe could be riskier than those perceived as risky. Investors tend to look at the risk of a stock as being the potential deviation of earnings from the anticipated level, and pay little attention to price. We have been saying for some time that low-volatility businesses priced at historically high relative P/E ratios are riskier than higher-volatility businesses priced at low relative P/Es. With interest rates so low, the stable, low-growth businesses that pay out a high percentage of profits as dividends have become favorite “bond substitutes” for investors seeking higher yield than is available in the bond market. These companies have typically been priced at lower-than-average P/Es, but today sell at substantial premiums. Even if the businesses perform about as expected, there is substantial risk should the P/E ratios revert to their long-term averages. If interest rates rise, as we expect, then P/E reversion is the likely outcome.
– Harris Associates
Sustainable Investing Continues to Grow in Importance
Like with Brexit, the U.S. is divided. The result of both may indicate a major shift in society. While we have seen this shift for a while, it has become more visible, and long term, structural and sustainable solutions are needed. Globalization is important as it leads to quicker development and lower poverty in emerging countries, but we should have a more thoughtful approach and manage the impact on local (developed market) manufacturing and employment better.
Urbanization in itself is a positive trend, with more access to education, health care and employment, and less negative impact on climate change, but we cannot forget the people living outside of cities. More than ever, we believe sustainability issues are driving the result of the elections. Furthermore, sustainability issues have been discussed more so now than during the campaign, and are likely to remain important topics: equal rights, fair treatment of women, tax evasion and fair tax contributions, general ethics. This strengthens our belief that thematic and sustainable investing will continue to grow in importance.
1. The Downside Risk Index (DRI) is a proprietary index designed by
AlphaSimplex to reflect the recent downside volatility of equity
markets. Here, downside volatility is a measure of the extent to which
recent volatility in an equity market’s daily returns has resulted from
negative price moves (as opposed to volatility resulting from positive
price moves). The DRI can range from 0 to 100, and higher values
indicate that the recent level of downside volatility has been high
relative to historically observed levels of downside volatility. The DRI
is not a prediction of future returns or volatilities of equity markets
and investors should not rely on this index when making investment
2. Source: Bloomberg. Data from January 1, 2016 to November 15, 2016. Weekly closing levels shown in the graph are the closing levels from the Friday of every week (1/1/2016–11/11/2016). Past performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.
3. A curve that shows the relationship among bond yields across the maturity spectrum.
4. Mirova, a subsidiary of Natixis Asset Management, is operated in the U.S. through Natixis Asset Management U.S., LLC.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that development will transpire as forecasted. Actual results may vary. The views and opinions expressed are as of December 7, 2016/ Q4 and may change based on market and other conditions.
About Natixis Global Asset Management
Natixis Global Asset Management serves thoughtful investment professionals worldwide with more insightful ways to invest. Through our Durable Portfolio Construction® approach, we focus on risk to help them construct more strategic portfolios that seek to endure today’s unpredictable markets. We draw from deep investor and industry insights and partner closely with our clients to put objective data behind the discussion.
Natixis Global Asset Management is ranked among the world’s largest asset management firms.1 Uniting over 20 specialized investment managers globally ($897 billion AUM2), we bring a diverse range of solutions to every strategic opportunity. From insight to action, Natixis Global Asset Management helps our clients better serve their own with more durable portfolios.
Headquartered in Paris and Boston, Natixis Global Asset Management, S.A. is part of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Global Asset Management, S.A.’s affiliated investment management firms and distribution and service groups include Active Index Advisors3 AEW Capital Management; AEW Europe; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments4 Dorval Finance5 Emerise6 Gateway Investment Advisers; H2O Asset Management5 Harris Associates; IDFC Asset Management Company; Loomis, Sayles & Company; Managed Portfolio Advisors3 McDonnell Investment Management; Mirova5 Natixis Asset Management; Ossiam; Seeyond7 Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Global Asset Management Private Equity, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity and Eagle Asia Partners. Visit ngam.natixis.com for more information.
1Cerulli Quantitative Update: Global Markets 2016
ranked Natixis Global Asset Management, S.A. as the 16th
largest asset manager in the world based on assets under management
($870.3 billion) as of December 31, 2015.
2 Net asset value as of September 30, 2016. Assets under management (AUM) may include assets for which non-regulatory AUM services are provided. Non-regulatory AUM includes assets which do not fall within the SEC’s definition of ‘regulatory AUM’ in Form ADV, Part 1.
3 A division of NGAM Advisors, L.P.
4 A brand of DNCA Finance.
5 A subsidiary of Natixis Asset Management.
6 A brand of Natixis Asset Management and Natixis Asset Management Asia Limited, based in Singapore and Paris.
7 A brand of Natixis Asset Management.